US telecommunications giant Verizon has announced its intention to acquire hosting provider Terremark for $1.4 billion.

Verizon’s business division and Terremark already partner to provide a cloud-hosting service for small and medium-sized businesses in the US. The service is based on virtualisation software from VMware, which acquired a 5% stake in Terremark in 2009.

The deal can be seen as an early example of consolidation in the cloud computing sector. Despite its relative youth, it is an industry that is prone to consolidation, as economies of scale are central to cloud-hosting business model.

Both Terremark and Verizon Business were named “leaders” of the infrastructure as a service (IaaS) and web hosting market by analyst company Gartner earlier this year.

Terremark, wrote Gartner analyst Lydia Leong, is “highly innovative and is very effective at exploiting new developments in technology”. Leong warned at the time, however, that the company’s “highly leveraged balance sheet and its focus on spending available resources on expanding its colocation business are inhibiting product portfolio investment and growth, and may be contributing to service woes”.

Meanwhile, Verizon Business’s Computing as a Service offering has high levels of customer satisfaction, Leong wrote. The company is making “marked improvements” to its service offering and provisioning system, she added, but these upgrades “make it difficult to predict the quality of service delivery”.

Leong’s report was controversial because Amazon, the company responsible for popularising cloud-based IaaS offerings, was not ranked among the leaders. Among Leong’s criticisms were that Amazon has “the weakest [service level agreement] of any of the evaluated competing public cloud compute services, even though its uptime is actually very good,” and that “its offering is developer-centric, rather than enterprise-oriented”.

Verizon Business originated in 2006 when the US telco acquired the company formerly known as WorldCom. Once a giant of the dot-com era, WorldCom filed for bankruptcy protection in 2002 after $3.8 billion worth of accounting fraud was exposed.